Can a mogul kick Indonesia's SOEs into shape?
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Can a mogul kick Indonesia's SOEs into shape?

Erick Thohir once owned the Italian football team InterMilan. Now Indonesia’s president Joko Widodo has handed him one of the country’s toughest jobs: reforming creaking state-owned enterprises. If he succeeds, he could even get a shot at the presidency.


The business of government is supposed to be, well, governing; providing services such as the defence of the homeland, law and order, education, social welfare, roads, trains and even utilities, as well as ensuring the financial system is fair and functional.

So, many Indonesians ask, why does their government in Jakarta also own banquet halls, a pawnbroker, a book publisher, hotels and a movie studio? What sort of national interest is served by ownership of a department store, textile companies, butchers and a trading house selling soap, ice cream and household cleaning products?

Indonesia’s profitless network of state-owned enterprises (SOEs) includes some of the country’s larger and better-known brand names – for example, flag carrier Garuda Indonesia, Bank Mandiri, and oil and gas group Pertamina – but with a few exceptions, it is a mess.

Over the decades, anachronistic ideology, political patronage and corruption, mismanagement and inertia have taken their toll on the SOEs; these days, they are seen as a potential tool when tackling the economic impact of coronavirus.

“This is the risk of the SOEs, that they can be used as a cash cow,” says prominent economist and former minister of finance, Muhamad Chatib Basri.

The ministry of SOEs calculated its collective debt was $98 billion last year, equivalent to almost 10% of national GDP. But that is likely to have grown in 2020 because of the pandemic, which has hit Indonesia the hardest among southeast Asian countries.

With 142 companies, their 341 ‘children’ and 317 ‘grandchildren’ – these are not Asiamoney’s categories, but how the Indonesian government officially describes its sprawling empire – the SOEs make up almost half of Indonesia’s GDP and employ millions of people, although not even the ministry that controls them can come up with precise numbers.

They operate across almost all sectors of the economy – agriculture, construction, financial services, manufacturing, mining and transportation.

I like Erick [because] he is highly listened to by the boss – and his business background
Former cabinet minister on Thohir, below

Indonesia’s banking sector is dominated by SOEs and is a rare success story. The semi-privatized Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara are counted among the biggest banks, and compete profitably and largely equitably against each other and the private sector in a deregulated market that was liberated and strengthened in the wake of the Asian financial crisis of 1997/98.

But the banks are the exception. Just 25 enterprises, according to a recent press report, generate 90% of total SOE revenues, and even fewer – mostly the banks – are profitable. The ministry is a confusing mix of divergent activities and competing interests.

Unlike in, say, Singapore, which has the state investment vehicle Temasek, there is no centralized state holding company that can create additional value from this empire, although there is a largely fruitless, ongoing discussion in Jakarta about creating a sovereign wealth fund to play that role.

Life at the ministry, say insiders, is a daily arm-wrestle for handouts and influence while at the same time trying to keep a lid on hidden debt bombs and scandals.

And then there is Jakarta’s poacher-gamekeeper conflict; the state owns two of Indonesia’s main airlines – as well as the regulator for Indonesia’s air space and its airports. It’s a similar situation with shipping and ports, roadbuilding and toll-road operation.

The OECD describes Indonesia’s SOEs as “more pervasive across the economy than in any country” except China, and calculates that the semi-privatized SOEs represent about a quarter of Indonesia’s stock market capitalization.

Former finance minister Chatib estimates SOEs account for between 40% and 50% of GDP, and describes their dominance of the economy as important. He is one of an increasing number of influential Indonesian thinkers who say it is high time the SOEs were overhauled.

This is not the empty wish of an outsider. Chatib is well-connected and knowledgeable. He is the chairman of Bank Mandiri, which is one of the biggest majority SOEs and one of the few stellar performers in the SOE stable. As a former finance minister between 2013 and 2014, it was Chatib who had to authorize capital injections to keep certain SOEs afloat.

Since October 2019, a new minister has been in charge of the SOEs – the private sector businessman and media mogul, Erick Thohir. He is the latest incumbent to promise to shake things up.

In his first year, he has told companies to shape up, replaced management, and called in anti-corruption investigators to poke through the books and ask uncomfortable questions. A few executives have been arrested.

No wonder Thohir, who didn’t respond to Asiamoney’s interview requests, has told reporters he has been physically threatened almost daily since becoming a minister.

Deep-seated problems

Reform can’t come a moment too soon. There are deep-seated problems at Indonesia’s state-owned enterprises, issues that will only be exacerbated by the economic and financial strains of coronavirus.

Krakatau Steel, Indonesia’s largest steelmaker, which was cleaned up for its stock market listing several years ago, was forced to reschedule $2 billion of debt in January, a move that Thohir described as one of the largest debt restructurings in Indonesian history.

Meanwhile, state-owned insurers Asuransi Jiwasraya and the military-linked Asabri don’t have the money to pay out more than $2 billion in maturing policies and investments; according to press reports, the ministry wants to restructure Jiwasraya’s policies, then shut it down.

Elsewhere, the top management of several companies have been detained on suspicion of corruption.

At Waskita Karya, the state construction firm that was at the forefront of president Joko Widodo’s populist push to upgrade Indonesia’s creaking infrastructure, debt has risen 10-fold in five years, reaching roughly $6 billion.

At bridge- and rail-building sister firm Wijaya Karya, debt has jumped six times over the same period, to more than $2 billion, made worse as Indonesia’s economy was impacted by the Covid-19 shutdown.

State utility Perusahaan Listrik Negara (PLN) reported a $2.77 billion loss in the first three months of 2020.

Garuda Indonesia, the grounded state airline, has asked for state aid after missing a debt payment.

“The government should not continue many of these state businesses,” says Didik Rachbini, senior economist at the prestigious Jakarta think tank Institute for Development of Economics and Finance (INDEF). “But every year, because of KKN [the Indonesian acronym for corruption, collusion and nepotism], there is approval to give public money... even though they make a loss. A lot of state-owned companies get public money without a reason.”

It is clear that anything [Thohir] leads will gain success
President Joko Widodo

Rachbini cites the example of Perusahaan Perdagangan Indonesia (PPI), the Indonesia Trading Company, which runs petrol stations, bottles drinking water and distributes rice, soap, household cleaning products and ice cream among myriad other product lines.

“There are 1,000 private-sector companies doing business like that,” he says. “But it’s very difficult to remove people from PPI.”

Not just at PPI. It is generally hard to cut the headcount at Indonesia’s bloated companies because of the country’s labour laws, a situation that has implications for corporate efficiency.

Consider the example of Singapore Airlines (SIA) in comparison with Garuda Indonesia.

Both are flag carriers and are majority-controlled by their respective governments; Garuda 61% and SIA 56% via Singapore’s Temasek.

Their respective fleets are roughly the same size; 142 for Garuda and 138 for SIA. Garuda flies to 95 destinations, SIA to 137 and SIA does so with around a third fewer employees than Garuda: 17,000 SIA staff to Garuda’s 25,000.

In the nine months to December 31, before Covid-19 devastated the regional airline industry, SIA made $629 million. In the same period Garuda made $122 million. SIA made almost three times more profit than Garuda with two thirds of the workforce.

As for the effective monopoly over power generation and distribution held by the loss-making state electricity company PLN, Rachbini says simply that “it’s political stupidity” and blames Indonesia’s parliament for blocking reform and deregulation.

PLN lost Rp38.9 trillion ($2.6 billion) in the first quarter of 2020, blaming higher costs and foreign exchange losses.

Rachbini says that financial support for SOEs is three to four times higher under the current government than under the previous administrations of president Susilo Bambang Yudhoyono, from 2004 to 2014.

Chatib’s 18 months as finance minister at the tail end of Yudhoyono’s presidency were notable for the limited amount of state support he provided to the SOEs; Chatib says he provided about $700 million in state capital injections, compared to about $7 billion annually today.

Indonesia seems ripe for a dramatic change to the way state business is undertaken but, as Chatib and other prominent economists note, Thohir will need the backing of the president and support from an often unruly parliament. And he will need to change the attitudes of those people who have prospered from the status quo.

A sensible first step would be to identify a potential national champion, Chatib says. That should be easy for Thohir, the former owner of international football teams.

“He needs to start with a success story,” Chatib says. “My suggestion to them is: why don’t you try to identify which sector or which company can be a champion? And people will support that idea.”

Another minister who would like that idea, according to one senior official, is Chatib’s successor (she was also a predecessor) as finance minister, Sri Mulyani Indrawati.

According to this official, Mulyani “is getting sick of sending all this money to support these companies, and for what?”


The task facing Thohir is huge. Even today, 55 years on, the country is working through a regime fashioned by the nationalist legacy of independent Indonesia’s first leader Sukarno, who was strongly influenced and aided by Mao Zedong’s China and by the Soviet Union, both then eager to extend their reach across southeast Asia.

Sukarno carved Indonesia’s state-owned sector from the holdovers from nearly 150 years of Dutch colonial rule, when companies such as Bank Rakyat Indonesia and Bank Tabungan Negara were created.

Modern-day Indonesia’s biggest telecommunications group, Telkom, was born of the colonial state telegraph service and, although partially privatized today, remains under Jakarta’s control through an all-powerful golden share.

Another Dutch government enterprise dating from these times is Balai Pustaka, or Bureau of Literature, which began life as a paternalist propaganda enterprise, printing and distributing ‘suitable’ reading material to colonial subjects. Today, it is a profitless publisher of some of independent Indonesia’s seminal nationalist texts, as well as producing the country’s school examinations papers.

The national electricity monopoly PLN began life in Dutch times. Other SOEs such as the Garuda Indonesia and trading house PPI also date from colonial times, albeit nationalized from private roots.

Indonesia’s biggest bus company was founded under Japanese occupation during the Second World War. Jakarta’s official news agency Antara was spun out of the semi-official propaganda outlet of both the Dutch and Japanese occupiers before becoming Sukarno’s nationalist information machine.

These businesses and many others were nationalized by Sukarno, dubbed the ‘father of the nation’, during his 20-year rule. Sukarno’s dirigiste ‘manipol’, or political manifesto, upon seizing power from the Dutch emphasised socialism and self-reliance. That led to an expansion of state power during his rule, including the creation of massive new SOEs.

State ownership of corporations became a crucial policy lever, even taking the place of monetary policy, in this guided economy.

Erick has good experience in business, but to lead the SOE ministry, this is not business, it’s politics
Didik Rachbini, INDEF

After a visit to Moscow in the early 1960s, Sukarno decreed that a state-owned department store should be built in downtown Jakarta, named Sarinah after his childhood nanny, with the power to keep down runaway inflation.

“Sarinah will become one of the important tools for the organization of Indonesian socialism,” Sukarno said. “If Sarinah sells a blouse for 10 rupiah, then another retailer will not dare to sell the same blouse for 20 rupiah.”

Another new SOE dating from his rule was cement-maker Semen Indonesia in 1957, which supplied the state’s construction company Wasita Karya, itself a private Dutch company that was nationalized.

One of 85 hotels in state hands, the five-star Hotel Indonesia, was built in downtown Jakarta in 1962 to showcase independent Indonesia’s modernity. Bank Negara Indonesia, which issued Indonesia’s first banknotes, was another creation of the Sukarno era.

By the time Sukarno was toppled in a 1965 military coup by Suharto, an army general who as a young lieutenant-colonel had supported Sukarno’s independence thrust in the 1940s, as much as 80% of Indonesia’s output was in state hands.

One dictator may have been replaced by another during the period 1965 to 1967, but economically and ideologically, the two autocrats were poles apart. With inflation soaring in four figures when Suharto took over, his New Order regime progressively replaced Sukarno’s isolationist autarky with market-driven reforms.

President Suharto, who ruled for 33 years, was advised by an influential cabal of liberal, Western-educated economists: the so-called ‘Berkeley Mafia’ reined in inflation, promoted foreign investment and encouraged private entrepreneurism. The economy took off from its depressed base, with annual growth averaging 6% to 7% for years until the economy collapsed in the Asian financial crisis and cost Suharto his presidency.

SOEs continued to be powerful under Suharto but they had a different function, becoming a way of rewarding the loyalists and cronies. Chronic mismanagement was overlooked in return for political favours and a reliable flow of illicit cash.

Indonesia’s modern cycle of corruption and patronage was established and became endemic, and sometimes with spectacular consequences, such as the 1975 failure of state oil monopoly Pertamina to pay off its debts.

Pertamina’s default is a salient, albeit often overlooked, lesson in Indonesia as to what can happen when mismanaged state-owned enterprises career out of control.

At one point, Pertamina’s revenues accounted for about 20% of the Indonesia economy. But when the company defaulted, it turned out it owed as much as $15 billion to foreign creditors.

That made it a national champion in a different way: it now boasted debt equivalent to roughly a third of GDP.

Pertamina was taken over by the government, effectively a re-nationalization of a nationalized asset, and the company was bailed out in a protracted refinancing, sending Indonesia’s foreign debt soaring.

“Pertamina has got to go through some sort of deregulation,” says a former minister. “It’s got an acute illness. It has a lack of vision. The downstream [refining and product distribution] really needs to be deregulated.”

Suharto also created a few SOEs of his own, including the national food distributor Bulog; a national aerospace company, now known as Dirgantara Indonesia; and, in 1980, Indosat, which runs Indonesia’s telecommunications satellite industry.

These and many other SOEs have muddled through a troubling history of state ownership and unclear incentives. Some have succeeded. But the net result has been a sprawling state ownership that has hindered rather than helped Indonesia’s economy.

Can the problem finally be addressed? Economists say unlocking the potential of the SOEs could add one or two percentage points to Indonesian GDP. But there are entrenched vested interests to be overcome, says a former cabinet minister.

While the root of the problem may be traced back in history, he adds, “let’s be honest about it, today, the truest ideology is Benjamin Franklin,” or the $100 bill.

Can you be an operator and a regulator too? There’s always been that debate in Indonesia. A former cabinet minister says: “I’m in the school of thought that we should be one or the other, not both. That takes me to the Temaseks and [the Malaysian government-owned] Khazanahs, where we indirectly own stakes in companies, but we – the government – are not regulating the landscape, we are not judging where the ball ought to be kicked.”

The former minister says there were “lots of conversations” about separating the two functions during his time in government, but that nothing ever happened.

“Do I predict that’s going to change over the next four years?” he asks rhetorically. “No. We are talking the port authority, the airline authorities, the fertiliser suppliers, the toll road operator. I don’t see that being OK. The banks are OK, there’s adequate distance between operator and regulator. And a lot of that was done in 1998,” in the aftermath of the banking crisis.

Business background

Thohir, appointed minister of SOEs by Widodo last year, appears to offer more hope for serious reform.

Unlike his eight predecessors since 1998, California-educated Thohir, 50, is at least a businessman, founding what has become the Mahaka Media group in 1992.

“I like Erick being in the position he’s in for two reasons,” says a former cabinet minister. “First, he is highly listened to by the boss [Widodo]. The second reason is his business background.

“The boss listens to two people: one is Luhut Binsar Pandjaitan [minister for maritime affairs and investment]; the other is Erick Thohir. He will give the right type of real-time advice about what needs to be done with PLN, Pertamina, Angkasa Pura [Indonesia’s airport owner-manager]. The banks don’t need much work, they’re doing fine. The shining example is Bank Mandiri.”

Not everyone is convinced. INDEF economist Rachbini, concerned about politically conflicted appointments to key SOE positions, says the ministry needs a professional technocrat in charge.

“Erick has good experience in business, but to lead the SOE ministry, this is not business, it’s politics…and the influence from politics is very big. I do not know how he can manage that.”

Business runs in the Thohir family, something that has helped Erick bring an eclectic contact book to the SOE ministry.

His late father, Teddy, was the co-founder and owner of trading company Astra International together with Indonesian-Chinese tycoon William Soeryadjaya. Today, Astra is one of Indonesia’s biggest automotive-based conglomerates.

If you change the ownership but don’t change the market structure, you just change the monopoly from the SOE to the private sector. It won’t help
Muhamad Chatib Basri, economist

Erick’s billionaire elder brother, Garibaldi – who is more commonly known by his nickname ‘Boy’ – is a prominent Jakarta financier: Garibaldi is also CEO of one of Indonesia’s biggest coal exporters, Adaro Energy, which he jointly owns with Edwin Soeryadjaya, son of William.

Erick Thohir is also tight with former Salomon Brothers investment banker Anindya Bakrie, eldest son of one of Indonesia’s most controversial business tycoons, Aburizal Bakrie.

In 2007, Erick and Anindya bought control of the leading free-to-air Indonesia television news channel tvOne, now part of the Bakrie group. Thohir and Bakrie both had interests in English football club Oxford United.

Oxford United was not Thohir’s only business foray into international sport, although he doesn’t seem to linger long in the deals. In 2011, he bought a stake in US National Basketball Association club Philadelphia 76ers, before selling out two years later. In 2012, he bought control of US Major League Soccer club DC United in Washington DC, but sold that in 2018.

In 2013, he bought a stake in Italian football powerhouse Inter Milan and was its chairman until October 2018, selling his stake in early 2019 to Hong Kong-based Lion Rock Capital, a private equity investor chaired by mainland Chinese businessman and Olympic gold medal gymnast Li Ning.

More recently, however, Thohir seems more interested in politics; he is widely thought to be considering a tilt at the Indonesian presidency, perhaps as early as the next election in 2024.

He is already building a reputation as a man who can get things done. He headed the organizing team staging the successful 2018 Asian Games in Jakarta and Palembang. He was rewarded by Widodo, who appointed him to run his re-election campaign in 2019; Widodo beat Prabowo Subianto, Suharto’s former son-in-law.

“It is clear that anything he leads will gain success,” Widodo said of Thohir.

When Widodo took up his second term as president, he brought his trusted aide into government and gave him the SOE portfolio.

That trust was further underlined in July as Indonesia’s economy reeled from the Covid-19 pandemic: Widodo appointed Thohir chairman of the government’s Economic Recovery and Covid-19 Handling Team. Indonesia has been hard hit by the pandemic, with more than 200,000 people declared infected and more than 8,000 deaths.

“Erick is now our economic czar,” a former senior government official told Asiamoney. “I would say he has more policy power now even than (finance minister) Mulyani,” he said. Widodo’s elevation of Thohir to the national Covid-19 committee is widely seen as a sign that the president is grooming his successor.

'Big bang'

How much change is in the offing for Indonesia’s SOEs?

“I believe an appetite is there,” says Chatib. “Economic theory tells us what to do, we need to reform, to privatize, etc. But economic theory is silent on how to do it, so it becomes a political issue and the question is if the [political] capital of the minister is unlimited. If it is, [Thohir] can do a big bang.”

Chatib believes companies that are neither profitable nor deemed strategic to Indonesia’s national interest will likely be abandoned by Thohir. He cites the example of the textile industry based in central Java, where the government is an active player.

“What’s the point of the government being in a textile company?” he asks. “It’s no longer making money, no longer relevant.”

Chatib recalls that when he was finance minister, his view was “if the project was commercially viable, like a toll road in Java, let the private sector do it. And if the SOE would like to participate, they have to compete.”

The government, in his view, should only step in when the private sector is unwilling or unable to do so.

There is pressure to break up national electricity supplier PLN and oil firm Pertamina, two of Indonesia’s biggest and least efficient SOEs. Privatization is possible, Chatib says, but he insists deregulatory reforms are needed first in the markets where SOEs operate before privatization can succeed.

“If you change the ownership but don’t change the market structure, you just change the monopoly from the SOE to the private sector. It won’t help,” he adds.

Jokowi [as Widodo is commonly known] has written a lot of political IOUs. He’s got to secure the runway until at least 2024 [the next election]. I don’t see major reforms of state-owned entities during this time,” says a senior official.

Chatib points to the disastrous semi-privatization of Telkom Indonesia in the middle of the 1990s: at the World Bank’s urging, it was broken into regions, the component offshoots backed by investment from foreign telcos. It was supposed to modernize the creaking network but, in reality, little changed.

Telkom went from being a national monopoly to a federated monopoly, one still plagued by corruption and vested local interests that worked against their foreign shareholders. Within a decade, the break-up had dissolved, Telkom was effectively put back together and the foreign partners exited with massive losses in operating costs and protracted legal bills.

The Telkom saga became an own goal for Indonesia that discouraged large-scale foreign investment for years.

Chatib cites Indonesia’s banking sector as an example of SOEs competing in a largely deregulated market against private sector banks. Indonesia’s banking collapse of the late 1990s led to the forced merger of many lenders, while bailout aid from the IMF and donor countries encouraged a few bold foreign buyers to snap up stakes in local banks, giving them relatively cheap access to a potentially large market.

Today, state-owned banks such as Bank Mandiri, Bank Negara, Bank Rakyat Indonesia and Bank Tabungan Negara compete against private sector banks such as BCA and Bank Sinarmas.

They compete against foreign-controlled local banks such as Bank Danamon (part of Japan’s MUFG group), Bank Niaga (CIMB of Malaysia), Bank Permata (Thailand’s Bangkok Bank) and Bank BTPN (Sumitomo), as well as foreign brands such as HSBC, Standard Chartered, DBS, Maybank and ANZ.

Indonesia now has one of Asia’s more open banking markets, albeit one closely regulated in the wake of the Asian financial crisis. Chatib says it’s a similar situation in the deregulated aviation sector. He thinks both could be models for other industries dominated by lumbering and monopolistic SOEs.

“If you look at the SOEs in banking, they are doing relatively well compared to other sectors,” he says.

With banking, Indonesia’s open market has proliferated to the point where Chatib says now Indonesia is overbanked and overdue for a further round of consolidation.

“I don’t think we need so many banks,” he says.

So far, Thohir’s moves as minister have been mostly sure-footed.

He has pledged to liquidate firms that fail to show they’re contributing to the country’s economic performance and welfare. He appointed the capable former Jakarta governor Basuki Tjahaja ‘Ahok’ Purnama as the new boss of Pertamina.

At Indonesia’s fourth-largest state lender, Bank Tabungan Negara, Thohir named Chandra Hamzah, former head of the Corruption Eradication Commission (KPK), as its new boss.

And he put trusted technocrats Zulkifli Zaini and Amien Sunaryadi in charge of lumbering state utility PLN.

Still, Thohir’s appointments of political aides and associates in other key slots have drawn comment; Rizal Mallarangeng (a senior Bakrie aide) and Wawan Iriawan have been named commissioners of Telkom Indonesia, while Widodo’s aide Darmawan Prasodjo, a key figure in the ruling PDI-P party, is on the PLN board. And there is talk that Thohir’s brother is lined up for an SOE job.

For decades, entrenched interests have opposed reform of the SOEs; but if Thohir gets it right, he just might be rewarded with an even bigger job – as the next president of Indonesia.

With additional reporting by Rin Hindriyati in Jakarta

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